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Inflation picks up while dollar drops

By ASSOCIATED PRESS
Published May 2, 2006

WASHINGTON - The national economy carried its strong momentum into the second quarter as factories cranked up activity, builders boosted construction spending to a record high and consumers opened their pocketbooks ever wider.

But inflation picked up, too.

The information was contained in three economic reports Monday.

"Households and corporations are still very active and are creating economic momentum, which is tremendously encouraging news for the economy," said Carl Tannenbaum, chief economist at LaSalle Bank. "The only dark cloud comes from the news on prices, which are going up."

A report from the Institute for Supply Management showed manufacturing activity grew briskly in April. The group's manufacturing index jumped to 57.3 in April from 55.2 in March, the strongest showing in six months.

The report also showed prices are rising not only for energy but also for other commodities, such as aluminum and copper.

"The indicators of prices ... are beginning to point more clearly toward inflation pressures," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Moreover, the sinking value of the U.S. dollar, which fell to a seven-month low against the Japanese yen, also raises some inflation concerns. A weaker dollar can increase the price of imported goods flowing into the United States.

That, in turn, can give U.S. companies more leeway to boost their own prices.

In a second report, the Commerce Department said total construction spending in March climbed to $1.199-trillion on an annualized basis, surpassing the previous record high set in February. That marked a 0.9 percent increase.

Private builders ramped up spending on a variety of projects in March, including residential construction and factories.

The government also spent more on big public works projects, including power plants.

"The construction engine was firing on all cylinders," said Ken Simonson, chief economist of the Associated General Contractors of America.

In another report from the department, consumer spending rose 0.6 percent in March, an improvement from February's 0.2 percent increase. Consumer spending plays a key role in shaping overall economic activity.

Incomes, the fuel for future spending, advanced 0.8 percent in March. That was up from a 0.3 percent increase in February and was the largest gain since September.

Income includes government payments as well as wages. Payments from the new Medicare prescription drug plan had the effect of helping to boost overall income in March. Wages, meanwhile, grew by a moderate 0.4 percent for the second month in a row.

The spending and income figures are not adjusted for inflation.

When adjusted for inflation, consumer spending looked more subdued, rising by 0.2 percent in both February and March.

The measure showed that prices - excluding energy and food - went up 0.3 percent in March, compared with a tiny 0.1 percent increase in February. Over the past 12 months, these "core" prices rose by 2 percent - considered the upper bound of the Fed's comfort zone for inflation.

The inflation reading didn't include the big runup in oil prices seen two weeks ago. At that time, oil prices topped $75 a barrel, a record high. Prices have retreated a bit since then.

To fend off inflation, the Fed is expected to boost a key interest rate to 5 percent at its May 10 meeting.

All three economic reports released Monday showed stronger economic activity than analysts were forecasting. That along with the inflation pickup "are issues the Fed will have to deal with," Tannenbaum said.